Private equity (PE) in health care — that is, for-profit ownership by private investors of health care providers and facilities — has grown considerably over the past decade, raising lawmakers’ concerns about its consequences for the cost, quality, and equity of health care services. But this concern has not yet translated widely into action. In this blog post, we’ll look at current private equity policy and how policy developments may influence the future spread of PE investment in health care.
There is some important context to consider at the outset:
First, controlling the spread of private equity will not reform a flawed health care system any more than treating fever would cure the infection causing it. The underlying problem is the commercialization of our health care system generally, which affects providers of diverse ownership. The desire of private equity investors to realize rapid returns and in the process strip out the assets of health care organizations is an extension of this process of commercialization. Controlling PE investment won’t eliminate our health system’s inherent weaknesses.
Second, the spread of private equity may be slowed even in the absence of outright bans or intrusive reviews. Private equity investment is based on calculations of return on equity. Any obstacles to PE deals — including potential delays to sales or expansion — add to transaction costs, which will deter investors.
Third, the results of the 2024 election may significantly influence the future of private equity in health care. Democrats tend to scrutinize and regulate PE more than Republicans do, though both parties share an interest in reducing the consolidation of health care providers, which PE may promote when it uses acquisitions to increase local market power, negotiate higher prices from insurers, and increase profits.
Activity at the Federal Level
Despite hearings and legislative proposals, Congress is unlikely to act on PE in health care anytime soon. Bills addressing the issue require 60 votes in the Senate, which seem unlikely to materialize. Therefore, any meaningful federal action depends on the executive branch using existing authorities.
Encouraged by President Biden’s executive order promoting competition in the economy, the Department of Justice and the Federal Trade Commission have aggressively investigated the antitrust implications of some private equity transactions and increased scrutiny of smaller acquisitions, such as physician roll-ups, which might result cumulatively in anticompetitive market shares. But using antitrust enforcement is a limited strategy as many PE deals may not raise antitrust concerns.
What Are States Doing to Manage Private Equity in Health Care?
Lack of congressional action means states will be central in efforts to manage PE in health care. Model legislation from the National Academy for State Health Policy (NASHP) emphasizes transparency about the ownership of health care facilities, state review of proposed health care acquisitions, and restrictions on the corporate practice of medicine — that is, preventing nonphysicians from controlling medical practice.
As of this writing, however, only five states — California, Indiana, Minnesota, New Mexico, and Oregon — have programs that directly or indirectly regulate private equity in health care. Potentially viable legislation is pending in Massachusetts, New Jersey, New York, and Pennsylvania. Except for Indiana, these states all are controlled by Democrats. Recently, Governor Gavin Newsom of California vetoed a bill — partly in response to aggressive lobbying against the legislation by provider and investor interests — that would have further intensified regulation of private equity. The governor claimed that existing review mechanisms were sufficient.
Most existing state laws require that all health care transactions exceeding a certain size, including those involving PE, are disclosed to the state. In some cases, the state requires prior approval by a designated state official, like the attorney general, or state agency. In other states, like New Mexico, state officials lack direct enforcement authority. New Mexico must ask the courts to block transactions of concern; in California, Governor Newsom’s veto leaves enforcement authority uncertain. Several states, including New Mexico, consider the details of the deals confidential, which significantly limits efforts to inform consumers and professionals about the ownership of health care facilities. No states have enacted all the provisions in NASHP’s model legislation.
There is a notable lack of policy activity on private equity in Republican-leaning states, though many experience significant PE investment in health care. For example, more than 15 percent of hospitals are owned by private equity companies in Texas, Oklahoma, Tennessee, Idaho, Kentucky, and Louisiana. Texas hosts the largest number of PE-owned hospitals at 97; Louisiana is next at 27.
Looking Forward
Legislation passed or pending in Democratic-leaning states may make these jurisdictions less attractive to private equity investors in the future. More conservative states, however, may see continued PE investment in health care, especially if interest rates fall (making investment capital cheaper) and if a new federal administration is less interested in regulating PE. If this occurs, private equity activity will become another factor dividing health care systems in conservative and progressive states and potentially affecting health care performance in parts of the United States that already demonstrate poorer population health outcomes and higher uninsurance rates.
